Most businesses—regardless the core offering—begin as a simple vision. Sometimes, as with the case of Netflix, a frustrating situation exposed a need and at the same time inspired an entrepreneur. A video rental late fee was the trigger that motivated Reed Hastings to develop one of the most successful click-and-mortar businesses to date—Netflix.com (Jayalath & Wood, 2005). Creating a lucrative e-commerce business requires many of the same basic components as a traditional business—including a cohesive business model, compelling marketing plan, and strong implementation strategy.

A perfect storm of advances in technology, adaptation of DVD media over VHS, and an unmet consumer demand is responsible for the successful launch of Hastings’ vision.

Netflix began its journey of trail-blazing business process innovation in 1997. Reed Hastings, along with partners Marc Randolph and Mitch Lowe, decided to disrupt the traditional video rental business by introducing a new twist on the home movie service (Thomas, 2010). A perfect storm of advances in technology, adaptation of DVD media over VHS, and an unmet consumer demand is responsible for the successful launch of Hastings’ vision. Not unlike other innovative start-up companies, Netflix has undergone several strategy shifts. Each change in focus or direction has assured the company remains dominate in the movie rental industry.

Success is never guaranteed, but a strong business strategy and cohesive implementation plan will increase the odds. Hastings began his business by declaring a simple yet effective mission statement, “our appeal and success are built on the most expansive selection of DVDs; an easy way to choose movies; and fast, free delivery (Brill, 2003).” While the original concept remains the same, the business strategy has evolved to satisfy new market opportunities. Notwithstanding slow adoption by the Internet user community, Netflix has become the perfect model from which all eBusinesses could learn.

Finding the Sweet Spot

Translating market opportunity into business opportunity requires a seven-step process. Hastings followed the seven-step framework to create the original company, but also continued to leverage individual steps to re-evaluate the Netflix position in the changing market. There are four key environments to consider when analyzing a market opportunity—customers, company, technology, and competition (Rayport & Jaworski, 2004). If the four key environments were signified by using overlapping circles of a Venn diagram, the market opportunity sweet spot would be represented in the area where all four circles intersect.

The first step of the seven-step process used by Netflix involved the identification of the unmet or underserved customer needs. Hastings, being a customer himself, was able to draw upon personal experience to help establish the opportunity nucleus. This set of unmet or underserved needs stemmed mostly from processes dictated by traditional video rental businesses. The movie rental industry had already established methods surrounding video rental, late return policies, and membership rules. Hastings believed that without competition, these brick-and-mortar movie rental companies would never have a reason to change.

Following the problem recognition step, a company needs to identify the target audience. Part of this process includes grouping customers into segments. Rayport & Jaworski (2004) refer to the most basic form of segmentation as the distinction between must-have and nice-to-have customers (pgs. 86-87). Segmentation for Netflix includes identifying customers using geographic, demographic, and behavioral segmentation approaches. The target audience for Netflix expands beyond the regions and primary market areas that typically define traditional brick-and-mortar businesses. The Netflix target audience is not limited by geography, but rather bound by technology.

The relative advantage to Netflix competitors begins with the use of technology. An Internet-based system allows a user to find movie titles easier than strolling the aisles of a video rental store. The entire supply-chain of the Netflix mail-order fulfillment system is more desirable than issues surrounding weather, store hours, and drop boxes. Netflix began its business with a distinct competitive advantage.

The next few steps—in the case of Netflix—were overlapping. Step four of the seven-step process involved assessing the resources necessary to deliver the benefits. Step five required an in-depth look into the technology required—including the impact of new technologies. The technology available in 1997 was primitive compared to what is available today. Broadband is commonplace, making the online users’ experience many times better than before—also positioning Netflix for the future. After distilling the opportunity into concrete terms, step six of the market opportunity analysis framework, Netflix justified their position in the market and identified the sweet spot of opportunity for their business.

Defining a Business Model

The value proposition, online offering, resource system, and revenue model combine to define the business model. The Netflix market position as described by Susan Verghese (2005) boasts “an easier way to choose movies, fast and free shipping, and no late fees or due dates.” The value proposition is comprised of three components—segment choice, benefit choice, and resource choice. Netflix’ segment choice encompasses all existing competitors’ customers as well as individuals beginning to desire movies-on-demand. The benefit choice revolves entirely around the convenience of making movie selections online. The resource choice is based on a strong distribution network and supply chain that rivals the competition.

The online experience of Netflix is their differentiator in the market. Following the membership model of other movie rental businesses, Netflix expanded the scope of their offering to include several levels of membership. Rounding out the business model, Netflix created an online community where member could contribute by offering and sharing reviews. The online business model developed by Netflix has become a beacon for others to follow (Venuto, 2010).

Creating the User Experience

Rayport & Jaworski (2004) identify seven design elements of a customer interface (pg. 151). Netflix follows best practices across all 7Cs—context, commerce, connection, communication, content, community, and customization. The context of Netflix’ site follows basic rules for ease of use and navigation standards for the web. Netflix.com uses a clean, uncluttered design to present an online movie rental experience second to none. The color scheme and graphic elements remain true to the corporate brand.

Content on the Netflix website consists mostly of movie imagery, descriptions and storylines, and member posted reviews. A non-member is presented with content designed to encourage enrollment, while the member community enjoys a user-specific experience. The movie titles presented to each member are relevant to his or her likes and dislikes—based on individual movie reviews. The content includes static information regarding the Netflix organization, its affiliates, career listings, and social networking links.

Netflix provides a robust community design element to their site. Members are invited to participate in reviews, forums, and blogs. Additionally, the tell-a-friend option creates a viral element useful in word-of-mouse marketing. The community element of Netflix.com falls short of providing functionality that allows member-to-member communication. The user provided movie ratings are real-time, but the written reviews are moderated before posting live to the site.

Every member can manage his or her own personal movie queue. Much like a playlist, the Netflix queue is used to control and manage the titles and order that the movies should be delivered to the member. The site uses this customization element to provide a member-specific experience to the user. Other customization features include the movie suggestion section. Every member receives an interactive list of movie titles that can be added to their playlist. Analyzing the member’s previously watched movies and the associated ratings provide enough information to create a suggested playlist.

Netflix has mastered the challenges associated with integrating their website and other communication channels. For example, each time a movie is returned—an email is delivered to the member. The member is asked to review the movie and offer additional comments if desired. Periodically, the member receives an email asking for information regarding the timing and condition of a DVD once delivered. This information is used to monitor the quality of service of the fulfillment centers.

The Netflix website offers no external links. The connection design element is not used on the Netflix member site. However, in the non-member and public areas within the website, Netflix offers external links to the websites of major publications, well-known critics, and other movie review sites. Netflix banner ads can be found on many popular sites. Each banner ad links to the Netflix main page.

Netflix’ commerce capability is limited only by its business model. The site, framework, and infrastructure can accommodate a full e-commerce shopping cart—but the only transactions are one-time enrollments and subscriptions to the monthly service. A member only revisits the commerce section of the site if a subscription needs to be changed. Transactions are automatic and recurring. Members spend the majority of their time within areas of the Netflix website that offers movie reviews and search capabilities.

The majority of communication from Netflix to their membership community falls within the generalized online framework for marketing communications (Rayport & Jaworski, 2004, pg. 197). Netflix uses several communication strategies for prospecting and acquiring new members. Of the four categories of communication—direct, personalized, mass marketing, and general approaches—Netflix relies mostly on the general approach of banner ads, email, and viral marketing. Members opt-in to receive special notices, offers, and incentives.

Netflix uses banner advertising to direct traffic from sites with a similar audience demographic as their current target market. Several years ago, Netflix made several attempts to create an additional revenue stream by including third-party advertisements in their own DVD mailings. This concept started when Netflix realized an opportunity to promote an upcoming movie by including imagery on the famous Netflix red envelopes (Anderson, 2005).

Company Culture and Considerations

Reed Hastings defined his approach to managing expectations within his organization as “freedom and responsibility” (Conlin, 2007). Netflix allows its managers to structure their own compensation plans, but expects ultra-high performance in return. Netflix operates as a single organization—with only an online presence. The supply chain, however, extends into many market areas. This model allows for low-cost, quick distribution of the movies.

The satellite fulfillment offices also present challenges with human resources. The turnover in the fulfillment centers is high. The culture at the corporate office level is revolutionary. However, the lack of culture at the lower levels presents challenges associated with recruiting, hiring, training, and retaining employees. Netflix’ culture has evolved over the years, but the underlying message remains the consistent—reward the employees that contribute the most.

The culture of Netflix is unique and proprietary, but effective. The company might struggle to service sixteen million members if a rigid traditional culture were adopted. The processes developed and enforced by the Netflix management team are the true strength of the organization. While the recent addition of streaming on-demand movies from a Wii console or PC reduces the demand of physical media, the rapid growth of the member base offers a balance.

Conclusion

Netflix has reported 550 million in revenue for the third quarter of 2010. The Netflix business model is a chameleon to technology. As new technology becomes available, such as faster connection speed, Netflix finds new opportunities. With the adoption of new products and services, Netflix can continue their rapid rate of growth—with no end in sight. Netflix has had a negative impact on several mainstream brick-and-mortar movie rental chains. Additionally, if Netflix’ streaming video service gains momentum, the U.S. Postal Service could feel a decline in service.

Netflix has managed to operate in a space free and clear of regulations. Their competitive advantage revolves around their supply-chain and fulfillment processes. Technology plays an important role in the distribution system of Netflix. Every order is automatically queued to the fulfillment office closest to the delivery address. A cohesive business model, compelling marketing plan, and strong implementation strategy is the only common ties between Netflix and other successful online businesses. Their success comes from technology, vision, and innovation. While difficult situations sometimes inspire genius solutions—Hastings vision to eliminate movie rental late fees has proven to be far beyond genius.

4 thoughts on “Netflix: An Online Business Beyond Genius”

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